Vulnerable people seeking debt help will get stronger protection against the risk of receiving unsuitable advice under proposals by the City regulator.
The Financial Conduct Authority (FCA) is proposing that debt packager firms should be banned from accepting referral fees, to reduce the risk of consumers being given advice that is biased towards solutions that may not meet their needs but will generate more cash.
Debt packagers are regulated advice providers which rely on referral fees paid by other firms when customers seeking help are passed on to them.
Our proposals aim to reduce the risk that consumers receive debt advice that is biased towards debt solutions that may not meet their needs but generate referral fees. https://t.co/PK77EQqsCL
— Financial Conduct Authority (@TheFCA) November 17, 2021
The FCA said the fees can be many times higher when consumers are referred to an insolvency practitioner for an individual voluntary arrangement (IVA) or protected trust deed (PTD).
This means debt packagers have a conflict of interest between giving advice in the customer’s best interest, and making a recommendation that makes the firm more money.
The business model puts consumers at risk of considerable harm from unsuitable debt advice, the regulator said.
The FCA estimates that 54,000 people sought advice from a debt packager in the year to March 2020, and demand for debt advice is rising.
The regulator added that it has seen evidence of debt packagers appearing to have manipulated customers’ details so they meet the criteria for IVAs/PTDs, and used persuasive language to promote products without explaining the risks.
The FCA’s proposals would protect consumers by banning debt packagers from accepting referral fees – eliminating the current business model for these firms.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Debt advice needs to be good quality and meet the needs of consumers.
“Too often people who contact debt packagers for help are being given advice that could cause them harm. This is unacceptable, especially as people seeking debt advice are often in vulnerable circumstances.
“Our proposals will address the inherent conflict of interest present in the debt packager business models. This will help protect consumers who need support managing their debts.”
Consumers who enter into an IVA or PTD that is not right for them can face serious consequences.
For example, if a consumer is accepted on to an IVA following poor advice from a debt packager when a debt relief order – an alternative form of personal insolvency – would have been more suitable, this could cost them an additional £4,710, and could mean it takes them five years longer to become debt free, the FCA said.
Consumers who need help with debts can get free and impartial advice from the MoneyHelper website or by telephone on 0800 138 7777, provided by the Money and Pensions Service.
The consultation is open until December 22. Subject to the consultation, the FCA expects new rules could come into force in April.